
19) The decision about where to invest abroad is influenced by behavioral factors. Explain the
behavioral approach to FDI.
Answer: The behavioral approach to analyzing the FDI decision is typified by the so-called
Swedish School of economists. The Swedish School has rather successfully explained not just
the initial decision to invest abroad, but also later decisions to reinvest elsewhere, and to change
the structure of a firm's international involvement over time. Based on the internationalization
process of a sample of Swedish MNEs, the economists observed that these firms tended to invest
first in countries that were not too far distant in psychic terms. Close psychic distance defined
countries with a cultural, legal, and institutional environment similar to Sweden's, such as
Norway, Denmark, Finland, Germany, and the United Kingdom. The initial investments were
modest in size, to minimize the risk of an uncertain foreign environment. As the Swedish firms
learned from their initial investments, they became willing to take greater risks with respect to
both the psychic distance of the countries, and the size of the investments.
Diff: 3
L.O.: 17.2 Structural Choices for Foreign Market Entry
Skill: Conceptual
AACSB: Application of knowledge
20) What are the advantages and disadvantages of serving a foreign market through a greenfield
foreign direct investment compared to an acquisition of a local firm in the target market?
Answer: A greenfield investment is defined as establishing a production or service facility
starting from the ground up, i.e., from a green field. Compared to greenfield investment, a cross-
border acquisition has a number of significant advantages. First and foremost, it is quicker.
Greenfield investment frequently requires extended periods of physical construction and
organizational development. By acquiring an existing firm, the MNE can shorten the time
required to gain a presence and facilitate competitive entry into the market. Second, acquisition
may be a cost-effective way of gaining competitive advantages such as technology, brand names
valued in the target market, and logistical and distribution advantages, while simultaneously
eliminating a local competitor. Third, international economic, political, and foreign exchange
conditions may result in market imperfections, allowing target firms to be undervalued. Many
enterprises throughout Asia have been the target of acquisition as a result of the Asian economic
crisis's impact on their financial health. Many enterprises were in dire need of capital injections
for competitive survival.
Cross-border acquisitions are not, however, without their pitfalls. As with all acquisitions—
domestic or international—there are the frequent problems of paying too high a price, or
suffering a method of financing that is too costly. Meshing different corporate cultures can be
traumatic. Managing the post-acquisition process is frequently characterized by downsizing to
gain economies of scale and scope in overhead functions. This results in nonproductive impacts
on the firm as individuals attempt to save their own jobs. Internationally, additional difficulties
arise from host governments intervening in pricing, financing, employment guarantees, market
segmentation, and general nationalism and favoritism. In fact, the ability to complete
international acquisitions successfully may itself be a test of the MNE's competence in the
twenty-first century.
Diff: 3
L.O.: 17.2 Structural Choices for Foreign Market Entry
Skill: Conceptual
AACSB: Application of knowledge